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Covariance |
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Definition of CovarianceCovarianceA measure of the degree to which returns on two assets move in CovarianceA statistical measure of the degree to which random variables move together.
Related Terms:Serial covarianceThe covariance between a variable and the lagged value of the variable; the same as Correlation coefficientA standardized statistical measure of the dependence of two random variables, Country betacovariance of a national economy's rate of return and the rate of return the world economy Homogenous expectations assumptionAn assumption of Markowitz portfolio construction that investors Magic of diversificationThe effective reduction of risk (variance) of a portfolio, achieved without reduction Portfolio varianceWeighted sum of the covariance and variances of the assets in a portfolio. Correlation coefficientA statistic in which the covariance is scaled to a Serial bondsCorporate bonds arranged so that specified principal amounts become due on specified dates. Term bondsOften referred to as bullet-maturity bonds or simply bullet bonds, bonds whose principal is CARs (cumulative abnormal returns)a measure used in academic finance articles to measure the excess returns an investor would have received over a particular time period if he or she were invested in a particular stock. NPV (net present value of cash flows)same as PV, but usually includes a subtraction for an initial cash outlay. PV (present value of cash flows)the value in today’s dollars of cash flows that occur in different time periods. Abnormal returnsPart of the return that is not due to systematic influences (market wide influences). In Acquisition of assetsA merger or consolidation in which an acquirer purchases the selling firm's assets. Adjusted present value (APV)The net present value analysis of an asset if financed solely by equity AssetAny possession that has value in an exchange. Asset/equity ratioThe ratio of total assets to stockholder equity. Asset/liability managementAlso called surplus management, the task of managing funds of a financial Asset activity ratiosRatios that measure how effectively the firm is managing its assets. Asset allocation decisionThe decision regarding how an institution's funds should be distributed among the Asset-backed securityA security that is collateralized by loans, leases, receivables, or installment contracts Asset-based financingMethods of financing in which lenders and equity investors look principally to the Asset classesCategories of assets, such as stocks, bonds, real estate and foreign securities. Asset-coverage testA bond indenture restriction that permits additional borrowing on if the ratio of assets to Asset for asset swapCreditors exchange the debt of one defaulting borrower for the debt of another Asset pricing modelA model for determining the required rate of return on an asset. Asset substitutionA firm's investing in assets that are riskier than those that the debtholders expected. Asset substitution problemArises when the stockholders substitute riskier assets for the firm's existing Asset swapAn interest rate swap used to alter the cash flow characteristics of an institution's assets so as to Asset turnoverThe ratio of net sales to total assets. Asset pricing modelA model, such as the Capital asset Pricing Model (CAPM), that determines the required AssetsA firm's productive resources. Assets requirementsA common element of a financial plan that describes projected capital spending and the Average (across-day) measuresAn estimation of price that uses the average or representative price of a Bond valueWith respect to convertible bonds, the value the security would have if it were not convertible Book valueA company's book value is its total assets minus intangible assets and liabilities, such as debt. A Book value per shareThe ratio of stockholder equity to the average number of common shares. Book value Capital asset pricing model (CAPM)An economic theory that describes the relationship between risk and Carrying valueBook value. Cash-surrender valueAn amount the insurance company will pay if the policyholder ends a whole life Conflict between bondholders and stockholdersThese two groups may have interests in a corporation that Continuous random variableA random value that can take any fractional value within specified ranges, as Conversion valueAlso called parity value, the value of a convertible security if it is converted immediately. Current assetsvalue of cash, accounts receivable, inventories, marketable securities and other assets that Discrete random variableA random variable that can take only a certain specified set of discrete possible Dynamic asset allocationAn asset allocation strategy in which the asset mix is mechanistically shifted in Endogenous variableA value determined within the context of a model. Excess returnsAlso called abnormal returns, returns in excess of those required by some asset pricing model. Exchange of assetsAcquisition of another company by purchase of its assets in exchange for cash or stock. Exercise valueThe amount of advantage over a current market transaction provided by an in-the-money Exogenous variableA variable whose value is determined outside the model in which it is used. Also called Expected valueThe weighted average of a probability distribution. Expected value of perfect informationThe expected value if the future uncertain outcomes could be known Extraordinary positive valueA positive net present value. Extrapolative statistical modelsModels that apply a formula to historical data and project results for a Face valueSee: Par value. Financial assetsClaims on real assets. Firm's net value of debtTotal firm value minus total firm debt. Fixed assetLong-lived property owned by a firm that is used by a firm in the production of its income. Fixed asset turnover ratioThe ratio of sales to fixed assets. Future valueThe amount of cash at a specified date in the future that is equivalent in value to a specified Graham-Harvey Measure 1Performance measure invented by John Graham and Campbell Harvey. The Graham-Harvey Measure 2Performance measure invented by John Graham and Campbell Harvey. The Intangible assetA legal claim to some future benefit, typically a claim to future cash. Goodwill, intellectual Internal measureThe number of days that a firm can finance operations without additional cash income. Intrinsic value of an optionThe amount by which an option is in-the-money. An option which is not in-themoney Intrinsic value of a firmThe present value of a firm's expected future net cash flows discounted by the Investment valueRelated:straight value. Liquid assetasset that is easily and cheaply turned into cash - notably cash itself and short-term securities. Liquidation valueNet amount that could be realized by selling the assets of a firm after paying the debt. Loan valueThe amount a policyholder may borrow against a whole life insurance policy at the interest rate Long-term assetsvalue of property, equipment and other capital assets minus the depreciation. This is an Limitation on asset dispositionsA bond covenant that restricts in some way a firm's ability to sell major assets. Market value1) The price at which a security is trading and could presumably be purchased or sold. Market value ratiosRatios that relate the market price of the firm's common stock to selected financial Market value-weighted indexAn index of a group of securities computed by calculating a weighted average Maturity valueRelated: par value. Measurement errorErrors in measuring an explanatory variable in a regression that leads to biases in Negative amortizationA loan repayment schedule in which the outstanding principal balance of the loan Negative carryRelated: net financing cost Negative convexityA bond characteristic such that the price appreciation will be less than the price Negative covenantA bond covenant that limits or prohibits altogether certain actions unless the bondholders agree. Negative durationA situation in which the price of the MBS moves in the same direction as interest rates. Negative pledge clauseA bond covenant that requires the borrower to grant lenders a lien equivalent to any Net adjusted present valueThe adjusted present value minus the initial cost of an investment. Net asset value (NAV)The value of a fund's investments. For a mutual fund, the net asset value per share Net assetsThe difference between total assets on the one hand and current liabilities and noncapitalized longterm Net book valueThe current book value of an asset or liability; that is, its original book value net of any Net present value (NPV)The present value of the expected future cash flows minus the cost. Net present value of growth opportunitiesA model valuing a firm in which net present value of new Net present value of future investmentsThe present value of the total sum of NPVs expected to result from Net present value ruleAn investment is worth making if it has a positive NPV. Projects with negative NPVs Net salvage valueThe after-tax net cash flow for terminating the project. Non-reproducible assetsA tangible asset with unique physical properties, like a parcel of land, a mine, or a Normal random variableA random variable that has a normal probability distribution. Original face valueThe principal amount of the mortgage as of its issue date. Other current assetsvalue of non-cash assets, including prepaid expenses and accounts receivable, due Par valueAlso called the maturity value or face value, the amount that the issuer agrees to pay at the maturity date. Parity valueRelated:conversion value Performance measurementThe calculation of the return realized by a money manager over some time interval. Policy asset allocationA long-term asset allocation method, in which the investor seeks to assess an Positive carryRelated:net financing cost Positive convexity property of option-free bonds whereby the price appreciation for a large upward change Positive covenant (of a bond)A bond covenant that specifies certain actions the firm must take. Also called Positive floatSee:float. Present valueThe amount of cash today that is equivalent in value to a payment, or to a stream of payments, Present value factorFactor used to calculate an estimate of the present value of an amount to be received in Present value of growth opportunities (NPV)Net present value of investments the firm is expected to make
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